Does conventional wisdom make economic sense? In many cases, it doesn't. This blog will question the economic efficiency and market viability of popular "solutions" to today's problems. Copyright 2011.

Thursday, February 19, 2009

A Moral Hazard

CNBC's Rick Santelli got it right about this "Mortgage Relief" being pushed by President Obama. While I generally stay out of particular political issues in this blog, the video clip really hits the nail on the head.

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

So, some homeowners got themselves into mortgages which they probably knew they wouldn't be able to make. Now that they are sinking, in rides the US taxpayer to bail them out. As somebody who pays their mortgage on time, I resent having to bail somebody out of their uninformed mortgage mistake. You can read a great primer about the financial crisis here and here.While I have sympathy for those who don't fully understand mortgages and mortgage documents, I don't have sympathy for mortgage brokers and those who just got big eyes for big houses. I also have only a modicum of sympathy for banks who were bullied into making bad loans by the US Justice Department via the 1977 and 1999 Community Reinvestment Act.

Although I could get on my soap box about thrift, savings, mortgages, living within your means, I won't. Rather, I wish that US citizens will seriously consider both the economic stimulus signed into law and these mortgage and mortgage relief provisions that President Obama wants passed. Finally, I tip my hat to Rick Santelli for telling it like it is.